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TreeHouse Foods (THS) Q3 Earnings Miss Estimates, Sales Up

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TreeHouse Foods, Inc. (THS - Free Report) posted third-quarter 2021 results, with the top line surpassing the Zacks Consensus Estimate and increasing year over year. However, the bottom line declined and missed the consensus mark.

The company’s top line gained from organic sales growth as well as benefits from acquisition of the pasta business. However, commodity and freight cost inflation as well as supply-chain disruptions were a drag. Nevertheless, prudent pricing actions enabled the company to offset inflationary headwinds.

For 2021, management lowered the upper limit of its sales view and curtailed adjusted earnings expectations. It also provided the guidance for the fourth quarter. Management expects supply chain and inflation-related headwinds to persist. Despite challenges, the company will continue to boost customer fulfillment capabilities, formulate alternative sourcing strategies and undertake efforts to retain labor. It will also continue to focus on pricing actions to offset inflation. Shares of the company were up 4.1% during the trading session on Nov 8, following the quarterly results.

In a separate release, the company announced that the board has approved plans to explore strategic alternatives for the business. This includes a potential sale of the company or divesting the Meal Preparation business to focus more on the Snacking and Beverages business. The move follows the company’s strategic review process, which began earlier this year. Management highlighted that these are likely to boost shareholders’ returns.  

Quarter in Detail

Adjusted earnings from continuing operations amounted to 46 cents per share, missing the Zacks Consensus Estimate of 49 cents. The bottom line declined 35.2% from 71 cents reported in the year-ago quarter.

Net sales of $1,101.2 million surpassed the consensus mark of $1,072 million. The top line increased 5.3% year over year, driven by 1.7% growth in underlying organic sales, a 3.2% gain from the pasta business acquisition and a favorable exchange rate impact of 0.4%.

Organic sales gained from favorable pricing, offset by unfavorable volume/mix (excluding buyouts). Favorable pricing impacts stemmed from the company’s prudent pricing actions to offset commodity and freight cost inflation. Volume/mix (excluding acquisitions) was unfavorable due to supply chain disruption caused by shortages and lower service levels, offset by higher demand in food-away-from-home and co-manufacturing sales channels as well as new product sales.

Gross margin came in at 16.3%, contracting 170 basis points from the year-ago quarter’s figure. The decline was caused by commodity inflation. Gross margin was also adversely impacted by supply chain disruptions leading to higher labor costs, supply shortages and unfavorable channel mix from increased food-away-from-home demand. The downsides were partly mitigated by favorable pricing actions to recover commodity and freight cost inflation, lower costs related to the COVID-19 pandemic and favorable volume/mix stemming from the inclusion of the high-margin pasta business acquisition.

Total operating expenses, as a percentage of sales, dropped 0.2 percentage points to 14% due to higher freight costs, somewhat offset by reduced employee incentive compensation expenses.

Adjusted EBITDA from continuing operations slumped 20.5% to $108.6 million due to commodity and freight cost inflation. The metric was also affected by supply chain disruption leading to higher labor costs and supply shortages as well as unfavorable channel mix from higher food-away-from-home demand. The downsides were offset by favorable pricing actions, lower employee incentive compensation expenses and a favorable volume/mix from the inclusion of the high-margin pasta business acquisition.

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

 

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

TreeHouse Foods, Inc. price-consensus-eps-surprise-chart | TreeHouse Foods, Inc. Quote

 

Segment Details

Meal Preparation: Sales in the segment rose 7.4% year over year to $690.2 million. The upside was driven by the favorable impacts from the inclusion of the pasta business acquisition and an increase in underlying organic net sales of 1.8%. Organic net sales were supported by improved pricing, partially offset by unfavorable volume/mix excluding acquisitions. Pricing was driven by prudent pricing actions, which partly offset commodity and freight cost inflation. Volume/mix (excluding acquisitions) was unfavorable due to supply chain disruption, which led to supply shortages and declines in service levels. This was offset by higher demand in the food-away-from-home and co-manufacturing sales channels. Direct operating income (DOI) margin in the segment contracted 3.2 percentage points, year on year.

Snacking & Beverages: Net sales increased 2% to $411 million, driven by growth in organic net sales of 1.6%. Organic net sales were supported by favorable volume/mix excluding acquisitions and higher pricing. Volume/mix excluding acquisitions was driven by new product sales, particularly in the Liquid Beverages category. Pricing gains were driven by an increase of $8.2 million in pricing actions that led to a recovery in commodity and freight cost inflation. DOI margin fell 6.1 percentage points.

Zacks Investment ResearchImage Source: Zacks Investment Research

Other Financial Updates & Guidance

The company concluded the third quarter with cash and cash equivalents of $67.4 million, long-term debt (excluding operating lease liabilities) of $1,893.8 million and total shareholders’ equity of $1,857.8 million. During the first nine months of 2021, cash provided by operating activities of continuing operations amounted to $60.7 million.

Management updated its 2021 guidance and provided fourth-quarter view. For the year, net sales are anticipated to be $4.20-$4.325 billion compared with $4.20-$4.45 billion expected earlier. The company posted net sales of $4.35 billion in 2020. Management expects the current operating constraints to limit the company’s ability to meet high demand conditions. Adjusted earnings from continuing operations are expected to be $1.08 to $1.28 per share down from the previous guidance of $2.00-$2.50 per share. The bottom line is likely to be affected by escalating inflationary trends as well as higher costs related to labor and supply chain disruption. The Zacks Consensus Estimate for sales and earnings in 2021 is currently pegged at $4.33 billion and $2.11 per share, respectively.

Fourth-quarter net sales are expected in the range of $1.04-$1.16 billion. Adjusted earnings are expected in the bracket of break-even to 20 cents per share. The Zacks Consensus Estimate for sales and earnings in the fourth quarter is currently pegged at $1.20 billion and 98 cents per share, respectively.

Shares of this Zacks Rank #4 (Sell) company have declined 4.6% in the past three months against the industry’s rise of 2.6%.

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